Troubled Cooperative Transformed Into Affordable Apartment Community Using Housing Credits
By A. J. Johnson & Caitlin Jones
8 min read
USING THE LOW-income housing tax credit and other resources, developer Jim Nichols has transformed a federally financed cooperative housing property that had been a financial prison for its residents into a renovated 150-unit apartment complex providing an affordable and comfortable place to live.
Located in the Kansas City, MO, suburb of Blue Springs, the awardwinning project, renamed as the Villas of Autumn Bend, opened in May 2007 and reached 95% occupancy in two months.
Nichols, a principal of Dalmark Development Group, LLC, Lee’s Summit, MO, first read about the plight of the residents of the multi-building complex, then called Meadow Ridge Townhouses, in January 2005. Residents units were desperately clinging to ownership of the co-op and their homes, but lacked the financial resources to rehabilitate the property and the ability to sell their units and move away.
“I was compelled to look into the situation and I saw a lot of potential,” Nichols told the Tax Credit Advisor in a recent interview. “In the Midwest, the cooperative structure does not have a big market appeal. People see homeownership differently here than on the East Coast where co- ops are more popular.”
Financially Trapped
Meadow Ridge was built in the 1970s as a cooperative financed by the U.S. Department of Housing and Urban Development (HUD) under its Section 236 program, with the aim of enabling residents to gain the benefits of homeownership. Tenants owned shares in the nonprofit cooperation that owned the property; ownership of shares entitles a tenant to occupy their unit.
Nichols said Meadow Ridge residents and board members were fighting a losing battle between maintaining affordable rents and balancing the financial and physical needs of the property. At the same time, individual residents, if they wished to move out, were required to pay $5,000 in fees to prepare the unit for sale, plus monthly charges, until a new tenant was secured, according to Brandon Laster of the Missouri Housing Development Commission (MHDC). Because there was low demand for the units, these monthly charges could accumulate for months, deepening the financial hole for residents wishing to sell and effectively forcing them to stay.
Some tenants were disabled and couldn’t climb stairs in their units, some wanted to be closer to their families, and others needed to move in order to purse better employment, Laster said. “They had a choice of: do I default on my co-op deal and move out and just not pay the fees, or am I stuck here because I can’t afford to take the job across town,” he said.
Rehab Work,Transformation
With the help of equity generated by low-income housing tax credits, tax-exempt bond financing, restructured HUD debt, and other resources, Nichols was able to buy and rehabilitate the property in a $13.5 million transaction and transform the deteriorating cooperative complex into a modern and affordable apartment community.
The Villas of Autumn Bend contains 58 two-bedroom units, 79 three-bedroom units, and 13 fourbedroom units. It opened with 60 percent occupancy, with monthly rents of $450 for two-bedroom units, $486 for three-bedroom units, and $520 for four-bedroom units. Fiftysix units have project-based Section 8 rental assistance under a renewed subsidy contract. The project is 97% low-income; the remaining units are market-rate that accommodated over-income residents at the time of the property’s sale.
The transaction involved the expenditure of approximately $6.5 million ($43,333 per unit) for rehabilitation; the property purchase price was $2.7 million. Rehabilitation work included such items as the repair of all drives and walks, additional site lighting, three new playgrounds, replacement of roofs, enlarged front porches, new windows, new kitchen cabinets and appliances, new HVAC systems, and an expanded and remodeled community building.
Nichols worked with the Kansas City police to locate a police substation within the community building.
Nichols had to obtain approval from the cooperative’s board of directors and from a majority of the co-op’s 122 owners at the time to move forward with his project. He won over owners by offering each a maximum amount of equity in their unit — based on bedroom size, determined by the original HUD financing, and averaging $6,137. This payout ended the cooperative structure and enabled residents to sell their units without being liable for repair costs or any monthly carrying costs while awaiting a new tenant.
Ownership of the property was transferred from the cooperative to a limited partnership.
Funding Sources
Funding sources for the $13.5 million transaction included $5.1 million in equity generated by the sale of federal and Missouri state housing tax credits, $6.1 million in tax-exempt financing that provided both construction and permanent financing, and $2.25 million in additional financing from MHDC. MHDA issued the tax-exempt bonds to fund the construction and permanent loans. The tax-exempt financing enabled the project to qualify for 4% federal housing credits for acquisition and rehab costs.
MHDC subordinated an existing note on the property. In the past, MHDC had purchased the notes on 26 HUD properties, including Meadow Ridge. It used proceeds from these notes to make the $2.25 million supplementary loan for the Villas of Autumn Bend, at 1% interest. Under the agreement with HUD, MHDC was required to reinvest proceeds from the 26 notes into the note-sale properties or adjoining properties.
An existing HUD Section 236 mortgage on the property was kept in place but subordinated to the new financing. The Section 236 Interest Reduction Payment (IRP) stream was “decoupled” from the 236 mortgage, allowing these payments to be captured and used to help pay debt service on the bonds.
Additional funding sources for the deal included the capture of existing reserves and a deferred developer’s fee.
Direct Investor, Award
N. Lynn Craghead, Senior Vice President of US Bancorp Community Development Corporation in Kansas City, said her company became a direct investor in the project on the strength of Nichols’ experience as a unique developer and his dedication to the tenants of the Villas.
U.S. Bank purchased both the federal and state housing credits, for a total equity investment of $5.1 million. Craghead said the bank also provided a $2.9 million letter of credit to enhance the tax exempt bonds during construction.
“U.S. Bank invested in three previous projects that Jim and his team developed and I knew that we would be proud of the completed project,” Craghead said. “At the end of the day, the final project far surpassed our expectation.”
She noted that only 20% of the total project cost was funded by hard debt, and 80% by tax credit equity and soft subordinate loans. “The relatively low hard debt allows the project to operate with very low rents,” Craghead said.
MHDC in late 2007 received a national Award for Program Excellence for The Villas of Autumn Bend, in the category of Rental Housing: Preservation and Rehabilitation, from the National Council of State Housing Agencies (NCSHA). Entries in the competition were judged on originality, innovation, cost efficiency, and consumer benefit.
NCSHA Executive Director Barbara Thompson said that Villas of Autumn Bend was nationally recognized because it exemplifies the innovation solutions that housing finance agencies offer when confronting threats to maintaining what little affordable housing that exists nationwide.
“MHDC’s initiative to save The Villas is a great example of how an HFA can lead the way with national and state partners to provide financing solutions that are safe, sound, and end up saving valuable affordable homes and improving communities,” Thompson said.
– Stephen K. Cooper
